ACIT, CENTRAL CIRCLE-2(3), KOLKATA, KOLKATA vs. M/S KWALITY LTD., NEW DELHI

आयकर अपील�य अधीकरण, �यायपीठ – “D” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH “D” KOLKATA Before Shri N.V.Vasudevan, Judicial Member and Shri Waseem Ahmed, Accountant Member ITA No.150/Kol/2017 Assessment Year :2011-12 ACIT, Central Circle- V/s. M/s Kwality Ltd. 2(3), Room No. 403, 4th F-82, Shivaji Place, Floor, Aayakar Bhawan, Rajouri Garden, New Poorva, 110, Shanti Delhi-100 027 Pally, E.M. Bye-pas, [PAN No.AABCK 1289 R] Kolkata-107 .. अपीलाथ� /Appellant ��यथ�/Respondent Shri G. Hangshing, CIT-DR अपीलाथ� क� ओर से/By Appellant Shri A.K. Tibrewal, FCA ��यथ� क� ओर से/By Respondent 28-02-2018 सुनवाई क� तार�ख/Date of Hearing 04-04-2018 घोषणा क� तार�ख/Date of Pronouncement आदेश /O R D E R PER Waseem Ahmed, Accountant Member:- This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-20 dated 08.11.2016. Penalty levied by Assessing Officer u/s 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 29.09.2015 for assessment year 2011-12. The Revenue has raised following ground:- “(i) That, under the facts & circumstances of the case and in view of the distinction of facts of the instant case (Discussed elaborately in respect to he statement of facts) that the of the case law relied upon in deciding the case in favour of the assessee, the Ld. CIT(A) erred in allowing relief to the assessee. (ii) That the appellant craves leave to add, alter or amend any ground or grounds of appeal before or at the time of hearing.”

ITA No.150/Kol/2017 A.Y. 2011-12 ACIT, CC-2(3), Kol. Vs. M/s Kwality Ltd. Page 2 Shri G.Hanshing, Ld. Departmental Representative appeared on behalf of Revenue and Shri A.K. Tibrewal, Ld. Authorized Representative appeared on behalf of assessee.

In respect of the aforesaid addition of Rs.42,06,434.00 which was offered by the assessee in the return filed u/s 153A of the Act, the AO initiated penalty proceedings u/s 271(1)(c) of the Act. The AO imposed penalty holding that the assessee has violated the provision of law enumerated in Section 271(1)(c) of

ITA No.150/Kol/2017 A.Y. 2011-12 ACIT, CC-2(3), Kol. Vs. M/s Kwality Ltd. Page 3 the Act by concealing particulars of income and imposed penalty u/s 271(1)(c) of the Act.

The assessee carried the matter to the ld. CIT(A) who deleted the penalty imposed by the AO.

The Revenue being, aggrieved by the order of ld. CIT-A is in appeal before us. 4. Ld. DR for the Revenue before us placed the reliance on several case laws as presented on the issue of whether “tick mark” not placed on the relevant pace as provided in the Notice u/s. 274 of the Act, outlining the type of default, would constitute ground for rejection of satisfaction and levy of penalty u/s. 271(1)(c) of the Act. First, the judgment of Hon'ble jurisdictional High Court in the case of Dr. Syamal Baran Mondal vs. CIT (2011) CTR 631 (Cal) stated that “section 271 nowhere mandates that recording of satisfaction about concealment of assessee’s income must be in specific terms and word, satisfaction of AO must reflect from the order either with expressed words recorded by the AO himself or by his overt act and action.”. The ITAT Mumbai Bench in the case of Trishul Enterprises Vs. DCIT (ITA No.384- 385/Mum/2014 for AYs 2006-007 & 2007-08) dated 10.02.2017 dismissed the contention of the assessee regarding failure of the AO to strike off the relevant part of the notice u/s. 274 for initiating proceedings u/s. 271(1)(c) of the Act. the ITAT relied upon the judgment of the Hon'ble Bombay High Court (Nagpur Bench) in the case of M/s Maharaj Garge & Company vs. CIT in its judgment dated 22.08.2017 has also held that “15. The requirement of Section 274 of the Income Tax Act for granting reasonable opportunity of being heard in the matte cannot be stretched to the extent of framing a specific charge or asking the assessee an explanation in respect of the quantum of penalty proposed to be imposed, as has been urged…..” It further observed that “16. It is not in dispute that a reasonable opportunity of being heard in the matter as required by Section 274 of the said Act was given to

ITA No.150/Kol/2017 A.Y. 2011-12 ACIT, CC-2(3), Kol. Vs. M/s Kwality Ltd. Page 4 the assessee before imposing the penalty by the I.T. Officer.” Further, the ITAT Mumbai Bench in the case of Earthmoving Equipment Services Corporation v.s DCIT 22(2) Mumbai (2017) 84 taxmann.com 51 opined that after perusing the ratio of the judgment rendered in Manjunatha Cotton and Ginning Factory we find that the assessee’s appeal was allowed by the Hon'ble High Court after considering the multiple factors and not solely on the basis of defect in Notice u/s. 274. Therefore we are of the opinion that the penalty could not be deleted merely on the basis of defect pointed by the Ld.AR in the notice and therefore the legal ground raised are rejected. He further submitted that service of notice u/s. 274 for initiating penalty proceeding u/s. 271(1)(c) of the Act would constitute valid initiation of penalty proceedings and the case may be decided on merits. He vehemently relied on the order of AO. 5. On the other hand the ld. Counsel for the assessee submitted before us that the show cause notice issued u/s 274 of the Act before imposing penalty does not contain the specific charge against the assessee namely as to whether the assessee was guilty of having concealed particulars of income or having furnished inaccurate particulars of income. A copy of the show cause notice u/s 274 of the Act was filed which is placed on record and perusal of the same reveals that AO has not “struck out” the irrelevant portion in the show cause notice and therefore the show cause notice does not specify the charge against the assessee as to whether the charge is of concealment of particulars of income or furnishing of inaccurate particulars of income. The ld. Counsel for the assessee drew our attention to the decision of the Hon’ble Karnataka High Court in the case of CIT vs. SSA’s Emerald Meadows in ITA No.380 of 2015 dated 23.11.2015 wherein the Hon’ble Karnataka High Court following its own decision in the case of CIT vs Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565 (Kar) took a view that imposing of penalty u/s 271(1)(c) of the Act is bad in law and invalid for the reason that the show cause notice u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealment of

ITA No.150/Kol/2017 A.Y. 2011-12 ACIT, CC-2(3), Kol. Vs. M/s Kwality Ltd. Page 5 particulars of income or furnishing of inaccurate particulars of income. The ld. Counsel further brought to our notice that as against the decision of the Hon’ble Karnataka High Court the Revenue preferred an appeal in SLP in CC No.11485 of 2016 and the Hon’ble Supreme Court by its order dated 05.08.2016 dismissed the SLP preferred by the department. The ld. Counsel also brought to our notice the decision of the Hon’ble Bombay High Court in the case of CIT vs Shri Samson Perinchery in ITA No.1154 of 2014 dated 05.01.2017 wherein the Hon’ble Bombay High Court following the decision of the Hon’ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory (supra) came to the conclusion that imposition of penalty on defective show cause notice without specifying the charge against the assessee cannot be sustained. Our attention was also drawn to the decision of Co-ordinate Bench of this Tribunal in the case of Suvaprasanna Bhattacharya vs ACIT in ITA No.1303/Kol/2010 dated 06.11.2015 wherein identical proposition has been followed by the Tribunal. 6. We have already observed that the show cause notice issued in the present case u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealing particulars of income or furnishing inaccurate particulars of income. The show cause notice u/s 274 of the Act does not strike out the inappropriate words. In these circumstances, we are of the view that imposition of penalty cannot be sustained. The plea of the ld. Counsel for the assessee which is based on the decisions referred to in the earlier part of this order has to be accepted. 6.1 We also find that in the identical facts & circumstances the Co-ordinate Bench of this Tribunal in the case of Nishith Kumar Jain Vs. ACIT in ITA 961- 964/Kol/2013 has decided the issue in favour of assessee vide order dated 10-2-2016. The relevant extract of the order is reproduced below : 9. We have considered the rival submissions. The argument of the learned counsel for the Assessee was that the show cause notice u/s.274 of the Act which is in a printed form and the AO has indicated in the said notice as to whether the penalty is sought to be levied on the assessee for “furnishing inaccurate particulars of income” or “concealing particulars of such income” by striking off the irrelevant

ITA No.150/Kol/2017 A.Y. 2011-12 ACIT, CC-2(3), Kol. Vs. M/s Kwality Ltd. Page 6 portion of the printed show cause notice. On this aspect we find that in the show cause notice u/s.274 of the Act the AO has not struck out the irrelevant part. It is therefore not spelt out as to whether the penalty proceedings are sought to be levied for “furnishing inaccurate particulars of income” or “concealing particulars of such income”. 9.1. The Hon’ble Karnataka High Court in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory, 359 ITR 565 (Karn), has held that notice u/s. 274 of the Act should specifically state as to whether penalty is being proposed to be imposed for concealment of particulars of income or for furnishing inaccurate particulars of income. The Hon’ble High court has further laid down that certain printed form where all the grounds given in section 271 are given would not satisfy the requirement of law. The Court has also held that initiating penalty proceedings on one limb and find the assessee guilty in another limb is bad in law. It was submitted that in the present case, the aforesaid decision will squarely apply and all the orders imposing penalty have to be held as bad in law and liable to be quashed. 9.2. The Hon’ble Karnataka High Court in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory (supra) has laid down the following principles to be followed in the matter of imposing penalty u/s.271(1)(c) of the Act. “NOTICE UNDER SECTION 274 59. As the provision stands, the penalty proceedings can be initiated on various ground set out therein. If the order passed by the Authority categorically records a finding regarding the existence of any said grounds mentioned therein and then penalty proceedings is initiated, in the notice to be issued under Section 274, they could conveniently refer to the said order which contains the satisfaction of the authority which has passed the order. However, if the existence of the conditions could not be discerned from the said order and if it is a case of relying on deeming provision contained in Explanation-1 or in Explanation-1(B), then though penalty proceedings are in the nature of civil liability, in fact, it is penal in nature. In either event, the person who is accused of the conditions mentioned in Section 271 should be made known about the grounds on which they intend imposing penalty on him as the Section 274 makes it clear that assessee has a right to contest such proceedings and should have full opportunity to meet the case of the Department and show that the conditions stipulated in Section 271(1)(c) do not exist as such he is not liable to pay penalty. The practice of the Department sending a printed farm where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law when the consequences of the assessee not rebutting the initial presumption is serious in nature and he had to pay penalty from 100% to 300% of the tax liability. As the said provisions have to be held to be strictly

ITA No.150/Kol/2017 A.Y. 2011-12 ACIT, CC-2(3), Kol. Vs. M/s Kwality Ltd. Page 7 construed, notice issued under Section 274 should satisfy the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended if the show cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee. 60. Clause (c) deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in Section 271(1)(c) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. After, he places his version and tries to substantiate his claim, if at all, penalty is to be imposed, it should be imposed only on the grounds on which he is called upon to answer. It is not open to the authority, at the time of imposing penalty to impose penalty on the grounds other than what assessee was called upon to meet. Otherwise though the initiation of penalty proceedings may be valid and legal, the final order imposing penalty would offend principles of natural justice and cannot be sustained. Thus once the proceedings are initiated on one ground, the penalty should also be imposed on the same ground. Where the basis of the initiation of penalty proceedings is not identical with the ground on which the penalty was imposed, the imposition of penalty is not valid. The validity of the order of penalty must be determined with reference to the information, facts and materials in the hands of the authority imposing the penalty at the time the order was passed and further discovery of facts subsequent to the imposition of penalty cannot validate the order of penalty which, when passed, was not sustainable. 61. The Assessing Officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income under clause (c). Concealment, furnishing inaccurate particulars of income are different. Thus the Assessing Officer while issuing notice has to come to the conclusion that whether is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pai reported in 292 ITR 11 at page 19 has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of MANU

ITA No.150/Kol/2017 A.Y. 2011-12 ACIT, CC-2(3), Kol. Vs. M/s Kwality Ltd. Page 8 ENGINEERING reported in 122 ITR 306 and the Delhi High Court in the case of VIRGO MARKETING reported in 171 Taxman 156, has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing Officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The standard proforma without striking of the relevant clauses will lead to an inference as to non-application of mind.” The final conclusion of the Hon’ble Court was as follows:- “63. In the light of what is stated above, what emerges is as under: a) Penalty under Section 271(1)(c) is a civil liability. b) Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. c) Willful concealment is not an essential ingredient for attracting civil liability. d) Existence of conditions stipulated in Section 271(1)(c) is a sine qua non for initiation of penalty proceedings under Section 271. e) The existence of such conditions should be discernible from the Assessment Order or order of the Appellate Authority or Revisional Authority. f) Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(1)(c), at least the facts set out in Explanation 1(A) & (B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision. g) Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under Section 271(l)(c) is a sine qua non for the Assessment Officer to initiate the proceedings because of the deeming provision contained in Section 1(B). h) The said deeming provisions are not applicable to the orders passed by the Commissioner of Appeals and the Commissioner. i) The imposition of penalty is not automatic. j) Imposition of penalty even if the tax liability is admitted is not automatic. k) Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the assessing officer in the assessment order.

ITA No.150/Kol/2017 A.Y. 2011-12 ACIT, CC-2(3), Kol. Vs. M/s Kwality Ltd. Page 9 l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bona fide, an order imposing penalty could be passed. m) If the explanation offered, even though not substantiated by the assessee, but is found to be bona fide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. n) The direction referred to in Explanation IB to Section 271 of the Act should be clear and without any ambiguity. o) If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the Assessing Authority. p) Notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income q) Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law. r) The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee. s) Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law. t) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings. u) The findings recorded in the assessment proceedings in so far as "concealment of income" and "furnishing of incorrect particulars" would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings.” (emphasis supplied) 9.3. It is clear from the aforesaid decision that on the facts of the present case that the show cause notice u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. Following the decision of the Hon’ble Karnataka High Court, we hold that the orders imposing penalty in all the assessment years

ITA No.150/Kol/2017 A.Y. 2011-12 ACIT, CC-2(3), Kol. Vs. M/s Kwality Ltd. Page 10 have to be held as invalid and consequently penalty imposed is cancelled. 9.4. For the reasons given above, we hold that levy of penalty in the present case cannot be sustained. We therefore cancel the orders imposing penalty on the Assessee and allow the appeal by the Assessee. In view of our above conclusions on the issue of defect in show cause notice u/s.274 of the Act, we are not dealing with the other arguments made on merits of the orders imposing penalty on the assessee.” In view of above, we therefore hold that imposition of penalty in the present case cannot be sustained and the same is directed to be cancelled. Thus we find no reason to interfere in the order of ld. CIT(A). Hence the ground of appeal filed by the Revenue is dismissed. 7. In the result, Revenue’s appeal stands dismissed. Order pronounced in the open court 04/04/2018 Sd/- Sd/- (�या$यक सद&य) (लेखा सद&य) (N.V.Vasudevan) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp, Sr.P.S (दनांकः- 04/04/2018 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-ACIT, CC-2(3), Room No.403, 4th Floor, Aayakar Bhawan, Poorva, 110, Shanti Pally, E.M. Bye-pass, Kolkata-107 2. ��यथ�/Respondent-M/s Kwality Ltd., F-82, Shivaji Place, Rajouri Garden, New Delh-027 3. संबं3धत आयकर आयु4त / Concerned CIT Kolkata 4. आयकर आयु4त- अपील / CIT (A) Kolkata 5. 7वभागीय �$त$न3ध, आयकर अपील�य अ3धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड< फाइल / Guard file. By order/आदेश से, /True Copy/ Sr. Private Secretary, Head of Office/DDO आयकर अपील�य अ3धकरण, कोलकाता ।